Brunswick Corporation (NYSE:BC) Q1 2024 Earnings Call Transcript

Brunswick Corporation (NYSE:BC) Q1 2024 Earnings Call Transcript April 25, 2024

Brunswick Corporation misses on earnings expectations. Reported EPS is $1.35 EPS, expectations were $1.36. Brunswick Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Brunswick Corporation’s First Quarter Year 2024 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today’s meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Neha Clark, Senior Vice President, Enterprise Finance Brunswick Corporation. Thank you. You may now begin.

Neha Clark: Good morning, and thank you for joining us. With me on the call this morning are Dave Foulkes, Brunswick’s CEO; and Ryan Gwillim, CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, our comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on these factors to consider, please refer to our recent SEC filings and today’s press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today’s results. I will now turn the call over to Dave.

Dave Foulkes: Thanks, Neha, and good morning, everyone. Brunswick had a solid start to the year delivering sales, margin, and adjusted earnings per share consistent with expectations despite continued customer caution in the face of the economic uncertainty. Our performance benefited from continued market share gains, the wealth of recently launched and well-received new products, and comprehensive cost control measures across our businesses, offset higher promotions and discounts on some product lines. We also continue to make good progress on our strategic initiatives. Our first quarter net sales of $1.4 billion and adjusted earnings per share of $1.35 were in line with our guidance range and consistent with the anticipated restrained early season marine dealer OEM and retail wholesale order patterns which reduced production rates across our product businesses compared to the first quarter of 2023 when pipelines were being filled.

Mercury Marine continued to capture market share with first quarter U.S. outboard retail share of 200 basis points versus prior year. Our early season boat unit retail performance is tracking with our outlook of flat to 2023. As we move into the core 2024 retail selling season we continue to work closely with our channel partners to maintain balanced current model field inventory levels and we close the first quarter with 36.1 weeks on hand in the U.S., which is in line with historical norms. In addition during the quarter we successfully completed a debt issuance of $400 million to cover the refinance of our only near-term debt further solidifying our cash position and balance sheet. I’ll now turn to some segment highlights for the quarter.

Our propulsion business delivered lower sales and earnings versus a record first quarter of 2023 as boat manufacturers and dealers moderated order patterns and managed production of current model year products and pipelines ahead of the annual model-year change-over. We expect OEMs to remain cautious through the model-year change-over as they assess consumer sentiment and monitor the macro environment. Mercury continued to outperform the market gaining 330 basis points of U.S. outboard market share in engines 150 horsepower and above. Our engine parts and accessories business continued its steady performance with sales and earnings down modestly from the first quarter of 2023 as anticipated but increasing sequentially over the prior quarter.

Early season weather patterns have been supportive of boating in the northern U.S. and with normalized inventory levels across the dealer network continued strong boating participation should contribute to growth for the remainder of the year. As expected Navico Group had lower sales and earnings versus the first quarter of 2023, but delivered sequential sales growth and consistent earnings versus the prior quarter. Navico Group continues to focus on investment in new products including the recently launched Simrad NSX Ultrawide multifunction display which has been very well received by customers and is preparing for several important new product launches in the remainder of the year. Finally, our boat business performs a plan with exceptional retail performance by Boston Whaler and Sea Ray at early season boat shows while continuing to introduce new models to support market share gains.

Sales and earnings were below prior year consistent with lower plan production levels while operating margins improved sequentially. Freedom Boat Club continues to deliver steady membership sales and same club sales in the quarter were mid single digit percent above prior year. Freedom has now expanded to 413 worldwide locations. Shifting to external factors now, U.S. GDP and employment remain stronger than anticipated, slowing the recent pace of disinflation and consequently the lightly cadence of Fed rate reduction, which in turn is keeping consumer loan rates high. We are however seeing a higher proportion of buyers with high credit scores financing their purchases than in recent prior periods. An interest in the recently launched Brunswick retail finance program continues to increase with more than 35% of Brunswick boat dealers having enrolled.

The Marine industry is continuing to lobby against the proposed NOAA East Coast vessel speed regulation and advocate for technology based solutions. However the exact contents of the proposed rule remain unknown, making an analysis of the impacts difficult. As noted dealer sentiment is generally sequentially improving, but with appropriate imagery levels they are carefully pacing wholesale orders particularly for current model-year, value product lines. We are working with dealers to deploy a portfolio of targeted discounts and promotions. On a per unit basis retail and wholesale program spending is in line with pre-pandemic levels, but floor-plan support spending is higher. Our investments in digital platforms continue to drive benefits across our brands with more than a third of Boat Group sales digitally assisted in the first quarter.

Our surveys continue to show strong boating participation levels supportive of steady P&A demand. Overall boat show results were encouraging with interested buyers, strong lead generation and sales above prior year levels on a unit basis and with a richer product mix. Our Boston Whaler and Sea Ray businesses demonstrated exceptional retail performance at early boat shows with new models supporting market share gains. Mercury Marine performed well at all major boat shows recording the highest outboard share at Dusseldorf, Miami and other key events. Shifting now to a global view of revenue in the quarter, overall we saw a 22% sales decline on a constant currency basis excluding acquisitions. Moving now to U.S. retail performance, U.S. industry new boat unit sales in the quarter declined versus the first quarter of 2023.

Brunswick internal retail data outperformed the overall market with particular strength in our premium brands. Our year-to-date global internal unit retail sales are flat to prior year including a solid start in the first weeks of the second quarter. It is not uncommon to see differences in SSI reporting and internal data at this point in the season, and our expectation of a flat retail market for the full year currently remains unchanged. U.S. outboard engine industry retail units declined 9% in the first quarter versus prior year. Mercury continues to outperform the market with an overall share gain of 200 basis points in the quarter. We continue to successfully manage both pipelines and we ended the quarter with U.S. inventory at 36.1 weeks in line with expectations and historical norms, and with 13,500 units in the pipeline versus nearly 18,000 units in 2019.

International boat pipelines were slightly higher which is normally the case. Notably our first quarter U.S. boat pipelines declined versus the end of the fourth quarter of 2023 which is unusual given the first quarter is commonly a period of building pipelines ahead of the selling season, underlining the caution being exhibited by our channel partners. I’ll now turn the call over to Ryan to provide additional comments on our financial performance and outlook.

Ryan Gwillim: Thanks Dave and good morning everyone. Brunswick delivered a solid first quarter consistent with guided expectations despite a continued cautious macroeconomic environment versus a strong first quarter 2023 net sales in the quarter were down 22%, resulting in an adjusted EPS of a $1.35. Gross margins have remained resilient, adjusted operating expenses were down $11 million versus Q1, 2023 and free cash flow performed better than anticipated as CapEx spending continues to moderate given the conclusion of several major capital projects in 2023. First quarter sales were below prior year as the impact of continued measured wholesale ordering patterns by dealers and OEMs coupled with higher discounts in some business segments was only partially offset by annual price increases market share gains and benefits from well received new products.

Adjusted operating earnings were down versus prior year as a result of the impact of lower net sales, unfavorable changes in foreign exchange rates and slightly higher input costs, which more than offset benefits from significant cost control measures throughout the enterprise. Now we’ll take a look at each reporting segment starting with our propulsion business. Sales and earnings were lower as anticipated as boat manufacturers and dealers moderated order patterns managing production of current model-year products and pipelines ahead of the retail season and model-year change. However, Mercury continued to gain outboard engine share as Dave discussed earlier and together with the impact of 2023 pricing gains and aggressive cost control measures partially offset the impact of lower sales unfavorable changes in foreign currency exchange rates, the lapping of prior year favorable variances related to timing of capitalized inventory and lower absorption from reduced production.

The engine parts and accessories business continued its steady performance with sales and earnings down modestly from the first quarter of 2023 as anticipated, but sequentially increasing over the prior quarter. Sales in the high margin products business were down very slightly while year over year distribution sales trends continued to improve. Segment operating earnings and margins decreased primarily due to the sales declines which offset the impact of pricing and cost control. Note that our transition into the Brownsburg, Indiana distribution facility is essentially complete, increasing our ability to service our international P&A customers in a more timely fashion. The result in the first quarter was growth in product sales in international regions while sales into U.S. channels were slightly down as dealers remain cautious on their inventory levels which remain normalized during the off season.

Navico Group reported a sales decrease of 24% driven by reduced sales to Marine OEMs as they moderate orders to control the pipeline of their current model-year products partially offset by strong new product momentum and improved RV sales trends. Segment operating earnings decreased from the impact of lower sales and increased discount activity which is only partially offset by lower operating expenses. Finally, our boat business delivered sales and earnings in the quarter consistent with expectations while continuing to ensure healthy pipeline inventory levels as we enter the prime retail selling season. Sales were down 26% versus Q1 2023 due to softer wholesale orders as our channel partners continued to order cautiously ahead of the model-year changeover partially offset by the favorable impact of carryover pricing and share gains.

Our premium brands continued to perform well at both wholesale and retail. Adjusted operating earnings were down primarily due to the lower sales and lower absorption from the reduced production partially offset by focused cost reduction activities. Freedom Boat Club which is included in business acceleration had another solid quarter contributing approximately 9% of the boat segments revenue during the quarter, while seeing very steady membership levels despite the macroeconomic uncertainty. Strong performance across our businesses allowed our first quarter performance to match expectations. Despite our year-to-date internal boat retail being flat to 2023, the continued economic uncertainty is resulting in cautious ordering patterns by our channel partners, making the rate and timing of wholesale acceleration and the balance of peak season wholesale sales between the second and the third quarters more difficult to predict.

Despite the challenging conditions we remain focused on moving forward with our new product plans and growth initiatives and driving resilient EPS and cash flow while continuing to balance production to support retail sales and manage pipelines. As a result, we are not materially changing guidance as we enter the main selling season. Please see the appendix for additional guidance regarding anticipated segment metrics. I will wrap up the financial update by sharing certain updated P&L, cash flow and other capital strategy assumptions for the full year. First, we increase their dividend by 5% in February and now anticipate a full year dividend of a $1.68. Next, FX is trending more negative than our initial expectations given the continued strength of the U.S. dollar and we now anticipate up to a $15 million negative earnings impact due to FX rates.

We hope to offset a portion of this impact with a slightly lower effective tax rate of approximately 22%. Lastly, as we continue to see near-term dislocation in our stock price and our cash generation remain strong, we anticipate spending approximately $250 million on share repurchases throughout the year, up $50 million from our initial estimate. I will now pass the call back over to Dave for concluding remarks.

Dave Foulkes: Thanks Ryan. We launched an extraordinary 25 new products across our businesses and brands during the quarter, representing an important contributor to near term and future growth. And I’d like to highlight just a subset. At the Miami International Boat Show we introduced some exciting additions to the FliteBoard product line. The Flite AIR and Flite AIR PRO are the most attainable models in the brand portfolio. And they’re enables to expanding participation to a broader set of consumers allowing significantly more people to enjoy the fliteboarding experience. Mercury expanded its joystick control technology to a broader set of single engine boat applications. Its joystick steering for single engine vessels is compatible with the Mercury Verado family of V8, V10 or V12 outboard engines from 250 to 600 horsepower.

Mercury also launched the fourth and fifth models in the expanding Avatar electric outboard product line. The 75e and 110e are the most powerful models introduced to date. We’re also very excited about the many new boat models launched across our boat brand. Including the new award winning Boston Whaler 365 Conquest and Harris 250 Crowne which both debuted at first quarter boat shows and feature Mercury high horsepower outboard engines and advanced Simrad electronics. We are seeing a very positive response to the recently launched Simrad NSX Ultrawide which is the industry’s first full functionality, high definition multifunction display and showcases the seamless interface of the latest Simrad Android operating system. In addition we launched the new Lowrance Eagle which is the latest offering in the brand entry level fishfinder chartplotter lineup and features improved clarity and depth performance through high definition sonar.

And finally, we continue to expand our Boateka certified pre-owned boat business with the opening of the newest Tampa location, which is strategically located near Freedom Boat Club’s largest corporate territories in Tampa Bay in southwest Florida. Boateka’s newest location will serve as a facility to accelerate certified pre-owned sales across the southwest Florida region. Before we conclude I’m thrilled to highlight the exceptional accomplishments of our teams from across the enterprise that were recognized with the record high number of awards in the first quarter. Brunswick was named to Forbes’ 2024 America’s best large employers list for the sixth consecutive year and also named to Newsweek’s list of the most trustworthy companies in America for the second consecutive year.

Brunswick innovation also continues to be recognized including with the consumer electronic show innovation award for the Mercury Avator 20e and 35e electric outboard motors. And we receive many awards for our products innovation, customer service and marketing at early season boat shows including a record 16 total awards at the Miami Boat Show. Thank you again to all our talented Brunswick employees who make this recognition possible. That’s the end of our prepared remarks. We’ll now open the line for questions.

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Q&A Session

Operator: Thank you. We’ll now be conducting the question and answer session. [Operator Instructions]. Thank you. And our first question is from the line of James Hardiman with Citi. Please proceed with your questions.

James Hardiman: Hey good morning. Thanks for taking my questions. I wanted to dig in a little bit on the retail commentary favorite topic trying to tease out the industry data versus what you think is right. So, just so I’m clear, your internal — the internal boat data for Brunswick suggest that you guys are flat, but you don’t think the industry is flat today. That’s more a commentary of how you think the industry is going to be for the year. Just wanted to make sure I understand that. And I guess it’s more broadly as I’m sure you’re aware, your biggest customer, but guidance for the second straight time today. And in particular, they seem to be surprised by the retail momentum so far this year. So just trying to connect those two dots. You guys seem to think that retail is going very much as planned. They seem to be surprised by the weakness. So help us understand?

Dave Foulkes: Yes, thanks James. Yes, a couple of things I guess. You’re correct. Our internal retail is essentially flat for the year including in the first couple of weeks of April. And you’re right, there’s often a dislocation at this time of year, in particular between SSI industry data, which I’m sure you saw is down about 10% in the main powerboat segment versus our internal retail. SSI suggests that industry is down 10 and Brunswick down about five. So we would be dislocated by something like the 5% for Brunswick. I think the — because a couple of things in the first quarter in particular, which is about 15% I think of the total year, we’re talking about relatively small numbers with a wider spread. And then, I think for the first quarter there’s a particular phenomena where I think SSI registrations you would think would some would leak into the following month of the next quarter, but they would be compensated by leakage from the last month of the prior quarter.

But in the first quarter the leakage from Q4 of 2023 is very low, because the sales are extremely low in Q4. So I think that the leakage tends to be more out into Q2 and less in into Q1 versus the end of the prior year. So I think that’s probably at least part of the phenomenon. Of course we can’t say exactly what independently what the total industry is doing. We think we are gaining some share which we noted about 50 basis points. but I think that’s unlikely to fully account for the SSI to internal retail Delta. And we expect as usual that they will — the gap will close as we go forward.

James Hardiman: Got it. And then the point on your biggest retailer just sort of the disconnect. And I would add, a lot of retailers sound a lot more negative than you guys on the on the first three and a half months of the year. Any thoughts on what feels at least in terms of tone, like a bit of a disconnect?

Dave Foulkes: Yes. I obviously I can’t speak for them. But I would say that we would probably both agree. I expect we’d agree that sales of our product, our premium product lines which of course they are a big part of Sea Ray, Whaler, to some extent a Harris Pontoon brand, but mainly Sea Ray and Whaler. I don’t know what they said about it, but sales of Sea Ray and Whaler have been strong. So if there is weakness in other parts I don’t know exactly what those parts are and how I might account for it. I would tell you it’s very clear that Sea Ray and Whaler had a good Q1, as reflected in sales at Miami for example and Dusseldorf that we published.

James Hardiman: Got it. And if I could just speak in one more. Next month, six weeks are going to be critical. What are you looking at most closely? I feel like us as analysts we become sort of weathermen this time of year. And for you guys in particular giving business the weather seems like it’s critical. But maybe walk us through what you need to see or don’t want to see in the context of your ability to hit the full year numbers?

Dave Foulkes: I mean whether that but I don’t think it’s one of the major factors we’re looking at unless there’s some you know extreme situation that’s unanticipated. We’ll be looking internally at order rates which will be for example Mercury and Navico Group, which will be driven by production rates at mainly our OEM customers. To some extent we’ll be looking at order rates from retailers for P&A and other things including for Navico. But really, I think as we go into the model-year, right now, I think the industry overall is pretty healthy proportion of current model product. I think about 75% of product in inventories is current model-year versus the prior model-year which is pretty decent. But as you as you approach June 1st and the model-year change-over, obviously this is a period where they’ll be relatively trying to minimize additional current model-year product.

When we cross into June, we would hope and expect to see an acceleration, because they’ll have to live with 25 model-year product for the next year obviously. In a very promotional environment — more promotional environment as we see at the moment, obviously the penalty of carrying prior model-year product is higher than it would be in a less promotional environment, because they’re adding discounts to clear prior model-year product once they go into June and beyond. So we refer to this issue of trying to understand exactly when the point of inflection is going to be. We would expect it to be a little bit more abrupt this year maybe than in the past few years just because the promotional environment really penalizes people for holding prior model-year, current model-year versus accelerating with new.

But we’ll be looking back to your question, we’ll be looking at order rates from OEM customers primarily.

James Hardiman: That’s really good color. Thanks and good luck to these next few weeks and months. Thanks David.

Dave Foulkes: Thank you very much James.

Operator: The next question is from the line of Scott Stember with ROTH MKM. Please proceed with your questions.

Scott Stember: Good morning and thanks for taking my questions.

Dave Foulkes: You’re welcome.

Ryan Gwillim: Good morning, Scott.

Scott Stember: Have you seen any change of on the credit side whether it’s the credit worthiness of customers coming in? And have you seen any tightening at the retail side on a credit perspective?

Dave Foulkes: We’ve seen people with high credit scores coming back into the market with financing a bit more than we saw in recent periods I would say. So, I would say, yes, people with good credit scores are coming back and financing a little bit more than they were in prior periods. Credit tightening I don’t think there’s any particular tightening at the moment. We’re in a relatively stable period I would say, and have been for the last, probably six months, I would say in terms of rates and credit score requirements.

Scott Stember: Got it. And then over to on the part side. It looks like sell-in was down 3%. Looks like the RV side is picking back up a little bit, but could you maybe talk about what you’re seeing at POS actual retail demand what’s being pulled through for both?

Dave Foulkes: Yes I think the retail demand is still pretty solid. I would say our products business was down a little bit by 3%, but it’s close to flat because it’s going to be probably. I think what we’re seeing really on the P&A distribution business is a bit of a reflection of what we’re seeing in all of our retail channels which is people know the product is available and so they’re not inclined to build as much inventory at the moment. Obviously, they’re watching their own balance sheets. So I just think that we’re seeing the effect of ready availability on people’s willingness to stock. At the moment I don’t think there’s anything probably more to it than that.

Ryan Gwillim: No. I think I would point out also is our Brownsburg Indiana facility is running at almost 100% capacity. It’s up and running and we have put behind us the kind of startup periods, and that efficiency is allowing us to service all of our customers a little bit better. But certainly our international customers are able to get product quicker. Inventory levels in the channel seem to be quite normal. And so, we would anticipate given we’re lapping periods of a little bit slower times at the end of last year that the next three quarters for P&A should be should be growth quarters.

Scott Stember: Got it. And just one quick last question David, you talked about I guess model-year changeovers. Can you maybe talk about the timing here, obviously when you have a lot of maybe not you but your competitors have 24 models in the pipeline. It kind of slows things down a little bit. What are you looking at from a timing perspective and maybe from a pricing perspective?

Dave Foulkes: I think the — I mean, the model-year change-over period it can’t be — we can’t legally if you like or based on regulations to introduce model-year into commerce before the 1st of June. But often it’s somewhat between the 1st of June and maybe into the end of July depending on what the kind of prevailing environment is. But given the penalty of additional discounts for prior model-year product at the moment, we’d expect most of our customers and certainly we will be introducing new model-year product on the earlier side of that, mainly in the first part of June. So we’re now running in a period where it’s just six weeks mainly to the model-year change-over, so we would expect people to be cautious about building inventory in this period and that’s exactly what we’re seeing. Sorry what was the other part of your question Scott. I missed it. I’m sorry.

Scott Stember: Yes, just on general thoughts on pricing.

Dave Foulkes: Our pricing, yes, our pricing will be very modest this year, and we’d expect that across the industry.

Scott Stember: Got it. All right, thanks guys. That’s all I have.

Dave Foulkes: Thank you.

Operator: The next question is from the line of Megan Alexander with Morgan Stanley. Please proceed with your question.

Megan Alexander: Yes, thanks very much. Thanks for taking our question. Maybe just a quick follow-up on some of the questions that have been asked. In the slides, in the prepared remarks, I think you talked about doing some more targeted discounts and promotions. I think mainly mostly on higher floor-plan support at this point. So, two-part question, I guess, is this just being absorbed somewhere else in the P&L at this point given you didn’t really change the guide around it? And then second point is, you know, given you can’t really time the inflection of when retailers and themes start to order the 25s. I guess, why not be more aggressive, or maybe you are, with supporting dealers in terms of promotions at retail and pushing through these prior year models? Or is it, you know, to Scott’s question, earlier, more question of the competition at this point?

Dave Foulkes: Yes, so we definitely, I would say, discounting is, really — when we say increased discounting, we’re talking about versus prior year, primarily, as opposed to versus plan. The discount rates are pretty much as planned. But in terms of targeting, yes, we certainly do support a kind of prior model-year, moving prior model-year product in the collaboration with our retail partners. But the other parts of targeting are really around model lines and segments that we target. Our premium product lines are not requiring a lot of discounting and promotional support at the moment. It’s not zero, but it’s not particularly high, versus some of the value product lines and fiberglass and some of the less expensive, I guess, more value orientated parts of our aluminum product line that require more support, even some of the pontoon product lines require more support.

So it’s really about which product lines and segments require support. The other thing that we’re cognizant of, obviously, is some of our models will be significantly changed at model-year, some less significantly changed at model-year. So the ones that are being significantly changed, obviously, we would add more promotional support to move out the prior model-year product. So those are more the kind of targeting things that we’re talking about. I think broadly, discounting promotion is not different to plan just higher than prior year.

Megan Alexander: Understood. Thank you. That’s helpful. And maybe just one quick follow-up. FX and incremental headwind, nice to see that you think you’ll be able to offset it with tax rate and good to see the higher share repo. But just given what’s gone on with the Fed and the uncertainty, understanding it’s early in the year, was there any thought to lowering the full year guide or maybe you can give us some context around how you thought about that?

Dave Foulkes: No, not really. I think when we gave ourselves some space in the guide at the beginning of the year. I think the $7 to $8 is a pretty decent amount of space. If we thought that was under threat, obviously, we would have considered it. But we don’t think it is at the moment. Yes, certainly, there are some ups and downs. And I’m very pleased that we were able to cover even in Q1 the FX headwind. I think it’s obviously given the market today particularly it’s good to be in the market with more share repurchases. We’re obviously biasing to the first half of the year. On that, so no consideration of changing guide at the moment.

Megan Alexander: Okay, great. Thank you so much.

Operator: Our next question is from the line of Craig Kennison with Baird. Please proceed with your questions.

Craig Kennison: Yes, thanks. She just asked my first question. So maybe I’ll just pivot. Dave, you mentioned the Atlantic speed limit proposal, which has gotten a lot more attention lately among the analyst community. But you also mentioned, I think, a possible technology based solution that might supplant a regulatory based solution. Just I’m wondering, do you have innovation in the pipeline? And could that be part of the solution? And do you think regulators might listen if you have that sort of pitch to offer?

Dave Foulkes: Yes, I think we’ve been very active in promoting existing and potential near future technological solutions. The proposed rule is really a huge overreach and completely ineffective way of approaching this. I think that it’s basically a placebo. But it is what it is. So I think first of all, the negligible evidence of a lot of boats, 35 feet and above contributing to whale deaths in any significant numbers, we could trace one in the last 20 years of a whale with an ID. So this is really a — it’s complete overreach. If you really wanted to try and address this, then we have to combine boats and infrastructure, for example, with AIS systems or tracking or sonar or vision systems, there are a lot of ways to do this in a much more effective way than is currently being proposed.

Concerning the rule, we don’t exactly know what the rule is. We know what some of the kind of drafts were, but we don’t see it until it gets published, if it gets published. And I would say the impacts are somewhat difficult to project. I think one of the analysts did an analysis based on 60,000 boats affected with a life of 20 years, which gives you a replacement of 3000 boats and then without market share. But there are a couple of factors to consider here. One is that the proposed rule that we saw has the limits effective in the off season, basically, from November through April, which is mainly off season for boats in that part of the market. And the assumption would be that somebody would say a 37-foot boat wouldn’t replace it with a 34-foot boat.

So I think it’s really difficult to project how this kind of plays out. But we’re concerned about it really because of the precedent it might set as opposed to the necessarily specifics of this particular implementation. It’s just a huge overreach.

Craig Kennison: That’s helpful. Thanks, Dave.

Operator: Our next question is from the line of Mike Swartz with Truist Securities. Please proceed with your questions.

Mike Swartz: Hey, good morning, guys. First question I may have missed it, but did you say what global either weeks on hand or pipelines were at the end of the quarter? And then just as it pertains to the full year guidance, what are you assuming are either weeks on hand or pipelines by the end of the calendar year?

Dave Foulkes: Weeks on hand at the end of the calendar year is the 37-ish range?

Ryan Gwillim: Down a couple of weeks at the end of the year.

Mike Swartz: So 37 by the end of the year?

Dave Foulkes: Yes, that’s right. It’s 36 right now. And we expect about 37 by the end of the year. That is what we are planning our production around, I would say, maybe more correctly at the moment.

Mike Swartz: Got you. And then just a second question. We get a lot of feedback on this from people in the industry, but I guess what are you doing to address affordability? I mean, I would assume there’s things you can do around pricing, things you can do around content, but maybe at a high level, what things are you addressing through affordability maybe with your model-year 25 product line?

Dave Foulkes: Yes, certainly. I mean, I think the — when you’re thinking about making a boat affordable, there’s lots we can influence in terms of base content. So we might adjust base content. We might, I think a couple of things. One is we offer versus pretty much everybody else, the broadest possible product line. We have boats, as we said, that sell for $1,000 and boats sell for more than a million dollars. So there are lots of ways to enter the market with us as it is. We can certainly control base content so that we make sure that we offer maybe a wrong on the ladder that wasn’t typically available. But there are broader considerations about resale value and other things that consumers are very aware of. There are certainly some boats that you just don’t want to decontent.

This is very similar to a car. If you want to sell it again after three years and it doesn’t have some key piece of content on it, then the resale is going to be lower. And I think people are smart enough to know that the consider resale when they’re buying something. So yes, we have a broad product line that will certainly, in some cases be adjusting some base content to maybe add a wrong on the ladder that wasn’t there before. But really, the product line, there’s a lot of the heavy lifting for us, I think.

Mike Swartz: Okay, thanks Dave.

Operator: Our next question is from the line of Matthew Boss with JPMorgan. Please proceed with your questions.

Matthew Boss: Great, thanks. So Dave, just to follow up on wholesale, could you just elaborate on the visibility today that you have in the second quarter relative to the back half wholesale orders? And just maybe how best to think about the drivers behind the OEM caution that you cited today relative to the sequential wholesale improvement that’s expected throughout the year?

Dave Foulkes: Yes. Well, I think the drivers, as I mentioned earlier, really are retailers not wanting to hold more current model-year inventory than they really have to support sales before the change-over, which will, for most people, be in June, because they have to apply typically additional discounting or promotions to some kind to move prior model-year product. So as soon as somebody is in the showroom of a dealer in June and they’re faced with a ’25 model-year and a ’24 model-year, on the floor, the dealer’s typically going to have to apply more promotional activity around the ’24 model-year. So I think that’s what’s driving it. I think also there’s just general caution at the moment around how the consumer is going to behave?

Is there a difference in behavior versus recent experience? I think we — at the moment, we don’t have a huge amount of insight into dealer orders in Q3 for our smaller product particularly. For our larger product, like the premium, like the bigger boats, the bigger Harris’s, the Whalers, the Sea Rays, the orders are much more visible to us. And it takes a long time to build one of those boats anyway. So if you want it in June or obviously in Q3, you’re already ordering it essentially. And we know that Q3 orders are already strong for those brands. So it really depends. The visibility we have is less for value product and more for premium product, I would say.

Matthew Boss: Great. And then maybe, Ryan, to follow up, just given the caution on overall first half wholesale orders, could you speak to how you’re managing costs in the expense base to offset the related absorption, headwind?

Ryan Gwillim: Yes. Obviously, our first quarter kind of speaks for itself, right? We took $11 million of OpEx out versus the same quarter last year. And all of our business units played a part. It wasn’t just one unit or corporate. So we have cost programs throughout the entire company, both to launch manageable costs, so things like spending on travel and things like that, but also making sure that we’re keeping our gross margins as strong as possible, right? It’s a two-part story. You can only take out so much OpEx at a time, but if you keep your gross margins stronger, that obviously plays a big role over time. And we’ve shown the resoluteness of those margins here over the last several quarters. So we will continue to be very mindful of cost as we progress.

But obviously, as new models come out with the model-year and other new products come out, where product margins continue to grow, that will help the gross margin line as well. So all of that is kind of ingrained in everything we do today.

Matthew Boss: Great. Best of luck.

Operator: Our next question is from the line of Fred Wightman with Wolfe Research. Please proceed with your question.

Fred Wightman: Hey, guys, I’m hoping we could just put some of the retail and wholesale discussions about the first half and the back half in the context with the 2Q guide that you put out there. So, on the earnings specifically, it looks like that’s a little bit below the street. And you’ve talked about some of the difficulties predicting OEM build schedules. So if we look at that 2Q number today, is that sort of where you thought it would be at the start of the year? Or are you assuming a little bit more back half-weighting, just given the fact that it sounds like people are holding off until model year ’25 start to hit? How should we think about the cadence, I guess, versus where it was three months ago?

Dave Foulkes: Yes, I think 2Q is maybe a touch lower. But if you look at the first half of the year, and you think we basically hit Q1, I think the street consensus with Q2 was like 203 in the middle of our guidance range is 195. So in the fall of the first half, we’re $0.08 different. So it’s really not a big delta here. But yes, for some of the factors that I just mentioned, I think we wanted to put a — we always want to put a range in there that is achievable in a range of potential scenarios. So that’s what we were considering. Ryan?

Ryan Gwillim: Yes, most of the $0.08 could be derived from FX. That is obviously playing a little bit bigger of a role. And just we did have a comment earlier about tax rate versus FX. The FX impact is more negative than the tax rate goodness is positive. So tax rate can play a little bit of a role, but in and of itself won’t get all the way there to cover FX if it continues to be as strong of a dollar as it has been the first 15 weeks.

Fred Wightman: That makes sense.

Dave Foulkes: What maybe one of our considerations here is obviously in the back half of ’23, that was a tough half of the fourth quarter, particularly when we were de-stocking heavily in the face of reduced orders from OEMs, provides us with a better competition.

Fred Wightman: That’s fair. And if we just shift to Freedom, is there — we’ve covered this sort of new boat retail environment handful of ways so far this call. But if you think about Freedom, it doesn’t sound like you’re seeing any signs of churn or unusual cancellations. Is there any thing that you can just sort of share as far as stickiness or maybe how that could potentially be an offset to some of these people who are delaying or deferring purchases in near term?

Dave Foulkes: Yes, I don’t know about the very last part about. It could be, I suppose, an offset that’s definitely possible. Churn is still in the 10% range, which is where it’s been in recent history. I would say, obviously, Freedom continues to benefit from not having been subject to the cumulative inflation impact that boats certainly have from a purchase perspective, and also not really subject to the higher interest rate environment. Because nobody, as far as we know, a few people are kind of financing their entry fee. So it’s — we think it’s overall just a bit more kind of immune to the broader macroeconomic stuff that’s impacting durable goods purchases. Freedom continues to expand, and we were very pleased to see increases in year-over-year, Same Club sales. That’s very satisfying. So the model is working very well and certainly helps our boat business pulling through additional units.

Fred Wightman: Thanks a lot.

Operator: The next question is from the line of Jamie Katz with Morningstar. Please proceed with your questions.

Jamie Katz: Hi, thanks for taking my question. And I want to focus on Freedom Boat Club. I think the statement on the call was that same-store sales or whatever metric was used, was at mid-single digits. And I’m curious if there’s been a shift that you’ve seen from what would traditionally be buyers to maybe members in the club, and whether there’s any way to discern that. And then after that, is FEC still sort of slated to run at that mid-single digit rate growth over the rest of the year? Thanks.

Dave Foulkes: Yes, thank you. We’re delighted with the performance of Freedom, not just in the domestic market, but also now in the European market, where there’s a heavy presence on the Australian market. And you should expect to see us expanding to other region, other geographies as well, since the model seems to be very robust in those areas. I can tell you, we may have the data to track if recent members are kind of trading off buying a boat to going into Freedom. I don’t have that data, but we could take a look at it to see if there’s any particular trend in that regard. I go back to the original data that we got when we were contemplating the acquisition of Freedom, and that was that very few Freedom members were contemplating buying a new boat.

But one of the things that we do benefit from now is that Freedom has a concierge service so that anybody who’s in Freedom and wants to buy a new boat is directed to one of our brands. So that’s extremely helpful. Freedom continues to grow and we anticipate solid growth through the balance of the year. I can’t remember the growth rate exactly that we’re anticipating. I don’t know, did we publish it? No. We didn’t publish a growth rate, but I think we expect solid growth through the balance of the year.

Jamie Katz: Okay. And then I know this was touched on earlier, but I’m assuming that the flattish market outlook is contingent on some internal look for interest rates. So, do you care to share with us what your internal expectations for rate movements are over the remainder of the year? Thank you.

Dave Foulkes: Yes, I think just like everybody else is that changing with time. So I don’t think we have any specific insights.

Ryan Gwillim: No, and our call for a flattish market did not anticipate multiple interests. I think it is separate from the overall interest rate environment. So we would not tie those two together on a one-for-one basis.

Dave Foulkes: Maybe one thing to consider as well is that because of, I mean, some of the promotional activity is dealers buying down interest rates or offering promotional rates. So there are many people who are financing their purchases and not financing at the base rate. They may be financing it at $4.99 or $5.99 with a promotional financing rate.

Jamie Katz: Right. Thank you.

Operator: Our next question is from the line of Xian Siew with BNP Paribas. Please proceed with your question.

Xian Siew: Hi guys, thanks for the question. There’s been some questions about, I guess, new boat sales, but I wanted to ask about engine retail, which was down looks like 9% per the slides, and you gained some shares. So maybe let’s say you were down, I don’t know, 6% or 7% . Its like, how does that track versus your expectations going into the year?

Ryan Gwillim: Yes, hi Xian. That’s kind of in line with our initial expectations for the quarter. We are very confident in our ability to continue to outperform the market and take share, certainly in the 150 horsepower in greater categories. So we don’t see that stopping. Retail obviously is going to be a function, as Dave said earlier, on OEM production schedules and also a little bit of the repower channel, which continues to be strong, where we also take share. So we’re kind of performing as anticipated right now. And again, subject a bit to the OEM production schedule of our core consumers continue to take more share, even if the industry as a whole is slightly more sluggish.

Xian Siew: Okay, got it. And maybe also following up on that in propulsion, I think mix was a benefit last year as you were kind of restocking from the higher horsepower engines. It sounds like maybe that continues a bit because you’re kind of mentioning the higher horsepower again, or do you kind of see a more normalization of that mix effect?

Ryan Gwillim: Yes, so there’s two components to mix, right? There’s the product component and the customer component. I would say the product component continues to be a positive, as again, market share gains and high horsepower continue, and that premium product continues to be quite strong. And then consumer mix changes from quarter-to-quarter, depending on who is buying it and wholesale. And in Q1, it was pretty neutral.

Xian Siew: Okay. Thank you.

Operator: Thank you. Our next question is from the line of Joe Altobello with Raymond James. Please proceed with your questions.

Joseph Altobello: Thanks. Hey guys, good morning. So first question maybe big picture. You mentioned fattish U.S. marine industry this year, Q1’s down 10%. And I know the months do start to get more important over the spring and summer, but what’s going to get retail to turn positive? And does pricing need to adjust to start to see unit growth again?

Dave Foulkes: Hi, Joe. I think does pricing need to adjust? I mean, I think at the moment, obviously, the transaction prices are quite different from whether it might be an MSRP or kind of recent historical pricing because of the promotion and discounting environment, particularly on value product lines. So, one of the things that we do have now that is an increasingly used capability is the ability to do AV testing in pretty localized portions of the market to see whether incremental promotional discounting activity will drive additional sales. So, some places we see it will, some places not necessarily so much. So, I think that I don’t think at the moment, transaction prices are broadly a big level. But they are certainly, the transaction prices are certainly improved by the discounting and promotion levels.

In terms of what will drive the consumer some more, in addition to what we can offer, I think obviously a good weather in the season will be really helpful. It always is. But then a little bit more clarity in the macro environment, obviously, it would be helpful too.

Joseph Altobello: Got it. Okay. And just to follow up on that, you said you anticipate shipping model-year ’25 a little earlier than normal. Any sense for when we might see competitive product in the channel? And could you guys have a bit of an advantage for a few weeks?

Dave Foulkes: I think most people will be implementing model change-over relatively early this year. So, I don’t know that we’ll get an advantage or not. I would say, though, that we continue to gain market share on the boat side. We talk a lot about the engine side, but just based on SSI, you know, we’re up 50 basis points so far this year. So, I think our new product investment, it is flowing through to a lot of really nice contemporary designs, with a lot of really strong and unique and differentiated technology is really helping us overall. And that’s what we will continue to do across our product lines is make sure we have the most contemporary looking and best featured bugs. So, I think that is probably a bigger source of competitive advantage for us.

Joseph Altobello: Okay. Great. Thank you.

Operator: Thank you. At this time, we’ve reached the end of our question and answer session. I’ll hand the floor back to Dave for closing remarks.

Dave Foulkes: All right. Thank you all very much for joining us and for the great questions. As you saw, despite the challenges, retail is currently proceeding more or less in line with our expectations. And we delivered a very solid quarter. I think the resilience of our portfolio is very much on display. Gross margins held up really well. And our cost control discipline is on display as well. I think we did a really nice job in the quarter and we’ll continue to do that. Field inventory levels remain extremely well balanced. So, we don’t have excess inventory and we think we’re really set up well for the balance of the year. Our free cash flow continues to be strong. And obviously, we did a really timely debt issuance. So, that allows us to increase share repurchases at a time when today I’m pleased that we’re going to be in the market with more share repurchases early in the year.

We’re going to bias that obviously to the first half of the year. So, overall, I think a solid quarter and a very balanced view of the year ahead. Thank you.

Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time. And thank you for your participation. Have a wonderful day.